(Article from Insurance Law Alert, October 2026)
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Holding
The Eighth Circuit, applying North Dakota law, reversed a $25 million judgment against an umbrella insurer, holding that the policy’s pollution exclusion barred coverage for bodily injury claims arising from an oil and gas well explosion. The court held that the insured’s failure to satisfy the written-notice condition of an exception to the exclusion precluded coverage, even though the insurer had not specifically objected to the untimely notice or demonstrated prejudice. XTO Energy, Inc. v. Commerce & Indus. Ins. Co., 2026 U.S. App. LEXIS 27406 (8th Cir. Sept. 3, 2026).
Background
This coverage dispute arose from an explosion at a North Dakota oil and gas well owned by XTO Energy, Inc. XTO retained Missouri Basin to perform services at the well under a contract requiring Missouri Basin to maintain liability insurance supporting its indemnity obligations. Missouri Basin obtained primary and umbrella policies from Berkley National Insurance and a $25 million second-layer umbrella policy from Commerce and Industry Insurance Company.
Following an explosion at the well, injured workers sued XTO and Missouri Basin. XTO defended and indemnified Missouri Basin pursuant to the parties’ contract and subsequently sought coverage from Commerce for amounts paid to the injured workers.
The Commerce policy’s pollution exclusion contains what the parties referred to as a “time element” exception that restores coverage if five conditions are satisfied, including that the release is reported in writing to Commerce within 21 calendar days after becoming known to the insured.
Commerce denied coverage based on the pollution exclusion and commenced a declaratory judgment action in federal district court. Although XTO conceded that it had not provided written notice within the prescribed 21-day period, the district court held that the time element exception restored coverage because Commerce had waived its untimely notice defense by failing to raise it in its denial letter. The court relied on North Dakota Century Code (“N.D.C.C.”) § 26.1-32-09, which provides that delay in giving notice “is waived . . . if the insurer fails to make a prompt and specific objection.” The court also held that Commerce could not rely on untimely notice as a defense without demonstrating prejudice under an earlier North Dakota Supreme Court decision, Finstad v. Steiger Tractor, Inc., 301 N.W.2d 392 (N.D. 1981).
Decision
The Eighth Circuit reversed, holding that the pollution exclusion barred coverage and that XTO’s failure to satisfy the notice condition prevented the time element exception from applying.
The principal issue on appeal was whether the exception restored coverage notwithstanding XTO’s admitted failure to provide notice within 21 days as required. The court distinguished between a late-notice defense, which Commerce had not raised, and the disputed issue in this case, which was a policy exclusion containing an exception that restored coverage if the policyholder provided timely notice and certain other conditions were satisfied. The court reasoned that, although N.D.C.C. § 26.1-32-09 requires an insurer to object promptly and specifically to a policyholder’s untimely notice, it does not preclude an insurer from denying coverage on a “substantively different” ground—here, a pollution exclusion. The court rejected XTO’s attempt to characterize the exclusion as a late-notice defense merely because the exception to the pollution exclusion contained a 21-day notice requirement.
The court explained that the distinction was reflected in the applicable burdens of proof. Although an insurer bears the burden of establishing that an exclusion applies, the insured bears the burden of establishing an exception to an exclusion. Commerce demonstrated that the underlying injuries fell within the pollution exclusion, but XTO could not establish the exception because it had failed to satisfy the 21-day notice condition.
The court also held that Commerce was not required to demonstrate prejudice. It distinguished the 1981 decision in Finstad, which imposed a prejudice requirement where the policy contained an indefinite notice provision and did not specify the consequences of noncompliance. By contrast, the 21-day notice requirement for the exception to the pollution exclusion in Commerce’s policy establishes a definite notice period and specifies that failure to comply renders the exception inapplicable.
Comments
This decision highlights the importance of distinguishing between a late-notice defense and a timely-notice exception to an exclusion. The court rejected the policyholder’s argument that the notice requirement in the pollution exclusion effectively transformed the pollution exclusion into a late-notice defense, stating: “We cannot accept this proposed transmogrification.” The distinction could be particularly significant in jurisdictions that may require insurers to demonstrate prejudice in order to prevail on a late-notice defense.